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Hearne Company has a number of potential capital investments. Because these projects vary in nature, initial investment, and time horizon, management is finding it difficult to compare them. Assume straight line depreciation method is used. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided.)

Project 1: Retooling Manufacturing Facility This project would require an initial investment of $4,960,000. It would generate $964,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,910,000. Project 2: Purchase Patent for New Product The patent would cost $3,785,000, which would be fully amortized over five years. Production of this product would generate $681,300 additional annual net income for Hearne. Project 3: Purchase a New Fleet of Delivery Trucks Hearne could purchase 25 new delivery trucks at a cost of $156,800 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $6,100. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $238,000 of additional net income per year. Required: 1. Determine each project's accounting rate of return. 2. Determine each project's payback period. 3. Using a discount rate of 10 percent, calculate the net present value of each project. 4. Determine the profitability index of each project and prioritize the projects for Hearne.

TABLE 11.1A Future Value of $1 Periods 2% 3% 3.75% 4% 4.25% 5% 6% 7% 8% 0 10000 10000 10000 10000 10000 10000 10000 10000 1.0000 1 10200 1.03001.0375 1.0400 1.0425 1.0500 10600 1.0700 1.0800 N 1.0404 1.0609 1.0764 1.0816 1.0868 1.1025 1.1236 1.1449 1.1664 3 1.0612 1.0927 1.1168 1.1249 1.1330 1.1576 1.1910 1.2250 1.2597 4 1.0824 1.1255 1.1587 1.1699 1.1811 12155 1.2625 1.3108 1.3605 5 5 1.1041 1.1593 1.2021 1.2167 1.2313 1.2763 1.3382 1.4026 1.4693 6 1.1262 1.1941 1.2472 1.2653 12837 1.3401 1.4185 1.5007 1.5869 7 7 1.1487 1.2299 12939 1.3159 1.3382 1.4071 1.5036 1.6058 1.7138 00 1.1717 1.2668 1.3425 1.3686 1.3951 1.4775 1.5938 1.7182 1.8509 9 1.1951 1.3048 1.3928 1.4233 1.4544 1.5513 1.6895 1.8385 1.9990 10 1.2190 1.3439 1.4450 1.4802 1.5162 1.6289 1.7906 1.9672 2.1589 20 1.4859 1.8061 2.0882 2.1911 2.2989 2.6533 3.2071 3.8697 4.6610 Periods 9% 10% 11% 12% 13% 14% 15% 20% 25% 0 10000 10000 10000 10000 10000 10000 10000 10000 1.0000 1 1.0900 1.1000 1.1100 1.1200 1.1300 1.1400 1.1500 1.2000 12500 N 2 1.1881 1.2100 1.2321 1.2544 1.2769 1.2996 1.3225 1.4400 1.5625 3 1.2950 13310 1.3676 14049 1.4429 1.4815 1.5209 1.7280 1.9531 4 1.4116 1.4641 1.5181 15735 1.6305 1.6890 1.7490 2.0736 2.4414 5 1.5386 1.6105 1.6851 17623 1.8424 1.9254 2.0114 2.4883 3.0518 6 6 1.6771 1.7716 1.8704 1.9738 2.0820 2.1950 2.3131 2.9860 3.8147 1.8280 1.9487 2.0762 2.2107 2.3526 2.5023 2.6600 3.5832 4.7684 7 8 00 1.9926 2.1436 2.3045 2.4760 2.6584 2.8526 3.0590 4.2998 5.9605 9 2.1719 2.3579 2.5580 2.7731 3.0040 3.2519 3.5179 5.1598 7.4506 10 2.3674 2.5937 2.8394 3.1058 3.3946 3.7072 4.0456 6.1917 9.3132 20 5.6044 6.7275 8.0623 9.6463 11.5231 13.7435 16.3665 38.3376 86.7362 TABLE 11.2A Present Value of $1 Periods 2% 3% 3.75% 4% 4.25% 5% 6% 7% 8% 1 0.9804 0.9709 0.9639 0.9615 0.9592 0.9524 0.9434 0.9346 0.9259 2. 0.9612 0.9426 0.9290 0.9246 0.9201 0.9070 0.8900 0.8734 0.8573 3 0.9423 0.9151 0.8954 0.8890 0.8826 0.8638 0.8396 0.8163 0.7938 4 0.9238 0.8885 0.8631 0.8548 0.8466 0.8227 0.7921 0.7629 0.7350 0.9057 0.8626 0.8319 0.8219 0.8121 0.7835 0.7473 07130 0.6806 5 6 0.8880 0.8375 0.8018 0.7903 0.7790 0.7462 0.7050 0.6663 0.6302 7 0.8706 0.8131 0.7728 0.7599 0.7473 0.7107 0.6651 0.6227 0.5835 8 0.8535 0.7894 0.7449 0.7307 0.7168 0.6768 0.6274 0.5820 0.5403 9 0.8368 0.7664 0.7180 0.7026 0.6876 0.6446 0.5919 0.5439 0.5002 10 0.8203 0.7441 0.6920 0.6756 0.6595 0.6139 0.5584 0.5083 0.4632 20 0.6730 0.5537 0.4789 0.4564 0.4350 0.3769 0.3118 0.2584 0.2145 Periods 9% 10% 11% 12% 13% 14% 15% 20% 25% 1 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8333 0.8000 2. 0.8417 0.8264 0.8116 0.7972 0.7831 0.7695 0.7561 0.6944 0.6400 3 3 0.7722 0.7513 07312 0.7118 0.6931 0.6750 0.6575 0.5787 0.5120 4 0.7084 0.6830 0.6587 0.6355 0.6133 0.5921 0.5718 0.4823 0.4096 5 LO 0.6499 0.6209 0.5935 0.5674 0.5428 0.5194 0.4972 0.4019 0.3277 6 09 0.5963 0.5645 0.5346 0.5066 0.4803 0.4556 0.4323 0.3349 0.2621 7 7 0.5470 0.5132 0.4817 0.4523 0.4251 0.3996 0.3759 0.2791 0.2097 8 00 0.5019 0.4665 0.4339 0.4039 0.3762 0.3506 0.3269 0.2326 0.1678 9 0.4604 0.4241 0.3909 0.3606 0.3329 0.3075 0.2843 0.1938 0.1342 10 0.4224 0.3855 0.3522 0.3220 0.2946 0.2697 0.2472 0.1615 0.1074 20 0.1784 0.1486 0.1240 0.1037 0.0868 0.0728 0.0611 0.0261 0.0115 TABLE 11.3A Future Value of an Annuity of $1 Periods 2% 3% 3.75% 4% 4.25% 5% 6% 7% 8% 1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 2 2.0200 2.0300 2.0375 2.0400 20425 2.0500 2.0600 2.0700 2.0800 3 3.0604 3.0909 3.1139 3.1216 3.1293 3.1525 3.1836 3.2149 3.2464 4 4.1216 4.1836 4.2307 4.2465 4.2623 4.3101 4.3746 4.4399 4.5061 5 5.2040 5.3091 5.3893 5.4163 5.4434 5.5256 5.6371 5.7507 5.8666 6 6.3061 6.4684 6.5914 6.6330 6.6748 6.8019 6.9753 71533 7.3359 7 7.4343 7.6625 7.8386 7.8983 7.9585 8.1420 8.3938 8.6540 8.9228 8 00 8.5830 8.8923 9.1326 9.2142 9.2967 9.5491 9.8975 10.2598 10.6366 9 9.7546 10.1591 10.4750 10.5828 10.6918 11.0266 11.4913 11.9780 12.4876 10 10.9497 11.4639 11.8678 12.0061 12.1462 12.5779 13.1808 13.8164 14.4866 20 24.2974 26.8704 29.0174 29.7781 30.5625 33.0660 36.7856 40.9955 45.7620 Periods 9% 10% 11% 12% 13% 14% 15% 20% 25% 1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 2 2.0900 2.1000 2.1100 2.1200 2.1300 2.1400 2.1500 2.2000 2.2500 2. 3 3 3.2781 3.3100 3.3421 3.3744 3.4069 3.4396 3.4725 3.6400 3.8125 4 4.5731 4.6410 4.7097 47793 4.8498 4.9211 4.9934 5.3680 5.7656 01 5.9847 6.1051 6.2278 6.3528 6.4803 6.6101 6.7424 7.4416 8.2070 6 7.5233 7.7156 7.9129 8.1152 8.3227 8.5355 8.7537 9.9299 11.2588 7 9.2004 9.4872 9.7833 10.0890 10.4047 10.7305 11.0668 12.9159 15.0735 8 11.0285 11.4359 11.8594 12.2997 12.7573 13.2328 13.7266 16.4991 19.8419 9 13.0210 13.5975 14.1640 14.7757 15.4157 16.0853 16.7856 20.7989 25.8023 15.1929 15.9374 16.7220 17.5487 18.4197 19.3373 20.3037 25.9587 33.2529 10 20 51.1601 57.2750 64.2028 72.0524 80.9468 91.0249 102.4436 186.6880 342.9447 "There is one payment each period, TABLE 11.4A Present Value of Annuity of $1 Periods @ 2% 3% 3.75% 4% 4.25% 5% 6% 7% 8% 1 0.9804 0.9709 0.9639 0.9615 0.9592 0.9524 0.9434 0.9346 0.9259 N 2 1.9416 1.9135 1.8929 1.8861 1.8794 1.8594 1.8334 1.8080 1.7833 2.8839 2.8286 2.7883 2.7751 2.7620 2.7232 2.6730 2.6243 2.5771 3 4 4 3.8077 3.7171 3.6514 3.6299 3.6086 3.5460 3.4651 3.3872 3.3121 5 07 4.7135 4.5797 4.4833 4.4518 4.4207 4.3295 4.2124 4.1002 3.9927 6 5.6014 5.4172 5.2851 5.2421 5.1997 5.0757 4.9173 4.7665 4.6229 7 7 6.4720 6.2303 6.0579 6.0021 5.9470 5.7864 5.5824 5.3893 5.2064 00 7.3255 70197 6.8028 6.7327 6.6638 6.4632 6.2098 5.9713 5.7466 9 8.1622 77861 7.5208 7.4353 73513 71078 6.8017 6.5152 6.2469 10 8.9826 8.5302 8.2128 8.1109 8.0109 7.7217 7.3601 70236 6.7101 20 16.3514 14.8775 13.8962 13.5903 13.2944 12.4622 11.4699 10.5940 9.8181 Periods 9% 10% 11% 12% 13% 14% 15% 20% 25% 1 0.9174 0.9091 0.9009 0.8929 0.8550 0.8772 0.8696 0.8333 0.8000 2 1.7591 1.7355 1.7125 1.6901 1.6681 1.6467 1.6257 1.5278 1.4400 3 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216 2.2832 2.1065 1.9520 4 3.2397 3.1699 3.1024 3.0373 2.9745 2.9137 2.8550 2.5887 2.3616 5 3.8897 3.7908 3.6959 3.6048 3.5172 3.4331 3.3522 2.9906 2.6893 6 4.4859 4.3553 4.2305 4.1114 3.9975 3.8887 3.7845 3.3255 2.9514 7 5.0330 4.8684 4.7122 4.5638 4.4226 4.2883 4.1604 3.6046 3.1611 8 00 5.5348 5.3349 5.1461 4.9676 4.7988 4.6389 4.4873 3.8372 3.3289 9 9 5.9952 5.7590 5.5370 5.3282 5.1317 4.9464 4.7716 4.0310 3.4631 10 6.4177 6.1446 5.8892 5.6502 5.4262 5.2161 5.0188 4.1925 3.5705 20 9.1285 8.5136 7.9633 7.4694 70248 6.6231 6.2593 4.8696 3.9539 There is one payment each period